Pricing a SAAS subscription can be tricky.
Since you’re selling an intangible service with relatively low variable costs, your pricing is likely to be based on perceived value. Whereas a physical product may be priced with a markup relative to the COGS, a SAAS-business may be priced with customer utility in mind. The subscription price should be reflective of the value the service provides to the customer. Price it too high and you limit your customer-base. Price it too low, and you’re leaving money on the table.
Finding the sweet spot can be difficult, and many companies choose to create tiered pricing instead. Tiered pricing allows SAAS companies to cater to businesses of all sizes. While tiered pricing appears to be the panacea to the SAAS pricing dilemma, it’s not without its flaws.
Tiered pricing brings a whole new set of challenges. You will need to decide how many tiers to offer, the features included in each tier, and the pricing for each subscription level. While there’s no universal solution to this challenge, there are best practices that can guide you to the best pricing model.
DO: Choose the Right Tier Variables
The first rule of tiered pricing is that each tier should meet the needs of a specific customer type, and in order to do that, you need to differentiate the plans using the proper variables.
As discussed earlier, SAAS-pricing is utility-based, and each pricing tier should be designed with the usage needs of the customer in mind. In order to achieve this goal, SAAS companies need to choose the proper variables to base the tiers off of.
The purest example of this pricing strategy in action comes from email service providers. We’ll use MailChimp as an example.
MailChimp offers subscription levels based on the size of customer mailing lists. If you have 1,000 contacts, you pay a different price than you would if you had 100,000 contacts. There are other differentiations between plans, but this is the main one. You pay for your usage levels.
This is EXACTLY how SAAS subscriptions should be distinguished. A tiered pricing model is designed to cater to a range of customers and MailChimp does this successfully.
This may seem obvious, but many companies fail to focus on the proper variable when creating tiered pricing.
For example, FriendBuy, a referral software company, varies their pricing based on the revenue of the company buying the subscription. If you make up to $50k in monthly revenue, you pay one price; if you make up to $100k you pay more. Since revenue doesn’t necessarily correlate with software usage levels (or even profitability), this may be an inappropriate tier differentiation.
DO: Consider the Competition
One of the biggest mistakes companies make when pricing their services is forgetting about the other services customer spend money on. Buyers tend to focus on their budgets in categories or groups. For example, an SEO company may have a $500/month software budget. In an effort to maximize the return on each customer, some companies try to consume as much of this budget as possible. The problem with this approach is that it assumes that one company’s offering can meet all of the needs of a particular example.
I’ll provide two examples: one general and one related to marketing.
Most people have some sort of budget for entertainment. This budget may be used for TV, movies, streaming media, live shows, etc. Hypothetically speaking, we’ll say this budget is $50/month. A company trying to consume this entire budget would price their service at exactly $50 in order to maximize the value of the customer. Of course, we know this would be foolish. Imagine if Netflix was $50/month. That wouldn’t leave room for customer’s who already had subscriptions for cable TV, Hulu, or HBO.
I’m constantly faced with this issue when I test new marketing tools. I personally pay for over a dozen subscription marketing tools. When these services are truly unique, I can justify the cost, but if they’re too similar to another service, I think twice. For example, I’m a big fan of SEMRush for managing search marketing campaigns, but I find their backlink monitoring to be lacking. I much prefer the backlink tools provided by Ahrefs, but since I’m committed to my SEMRush subscription, the $99/month Ahrefs subscription can be off-putting. Whereas I could easily justify a $49/month subscription for backlink tools only, I have a harder time committing to $99/month for tools I already have access to in another platform.
Of course, this isn’t to say that companies should provide a la carte offerings or price their services with the assumption that customers are using competing services simultaneously, but it’s important for companies to think about where they fall in a set of services. Are they standalone, complementary, or supplementary? Answering these questions can help SAAS business owners better decide which pricing tiers they’d like to include.
It can also help guide companies in the right direction. For example, MailChimp recently added new features for landing page design and ad management in an effort to pivot from an email marketing service to an all-in-one marketing suite. Considering most marketers use specialized services for these functions, the additional features didn’t add much value.
DO: Respect all Customers
A recurring theme of this article is that all subscription tiers should serve a purpose. It’s important to remember this and value every customer. If you don’t value your “lowest tier” customers, ditch the plan.
Customers don’t want to feel like they don’t matter. Monopolies don’t last forever and there’s an alternative service for almost everything.
Treat every customer with respect. This doesn’t mean higher paying customers can’t receive special treatment; it just means that the treatment shouldn’t come at the expense of other customers.
I’ve been in a similar position with my agency. I realized my business model was not designed to cater to lower paying customers (generally local businesses) so I stopped working with them. Furthermore, I don’t try to squeeze as much money as I can out of every client. Every client pays for what they need and I’m happy to work with all of them.
DON’T: Force Customers Into a Higher Tier
As a customer, it’s incredibly frustrating to feel like you’ve been forced into paying for something. I’ve already written two posts on this. The first referenced a 130% price hike that Instapage forced on its customers and the second referenced the greed of UpWork’s new subscription model.
No one wants to feel strong-armed when they open their wallets, especially if they’re already a customer.
With tiered pricing, every tier should serve a purpose (even the free tier). Companies shouldn’t aim to force customers into a higher tier. On paper, this may look like a revenue boost, but hidden beneath the surface is a swarm of angry customers. It’s certainly possible to squeeze more money out of your customers, but rarely is it sustainable.
This ties back to planning your tiers properly. If a certain pricing tier doesn’t serve a purpose, remove it.
DON’T: Withhold Important Features
As a service-provider, your first objective is to make sure customers are happy with your service. This doesn’t mean you give your customers everything they want, but you should do your best to make sure your catering to a range of customer needs. For example, if you have a “Small Business” subscription and a “Big Business” subscription, the former should cater to small business owners and the latter should cater to big business owners.
If you withhold critical features from small business owners in an attempt to get them to upgrade, they’ll likely go elsewhere. This is yet again another issue I referenced in my UpWork article.
UpWork moved a handful of their previously free features to their new premium subscription plan. This move wasn’t just greedy; it made the service less useful, which weakens the company’s position.
Imagine if Netflix limited the usage of their streaming service to desktop and mobile devices. If you wanted to use third-party devices like Amazon Fire TV’s and Xbox consoles, you’d have to upgrade to a higher plan. A move like this would instantly make the service less useful, giving customers a reason to think twice about renewing their subscriptions.
Companies often make this mistake in one of the worst areas possible: customer service. Higher paying customers may get access to 24/5 support whereas lower paying customers may be provided with 12/5 support. This restriction makes little sense when you consider the fact that customer support is designed to make a service more useful.
DON’T: Make Your Free Tier TOO Good
While SAAS companies shouldn’t withhold key features from paying users, they should also avoid making their free tier TOO good.
Many SAAS companies utilize a freemium model to attract customers who will eventually be upsold to a paid subscription. In many cases this is effective, however, sometimes, the free plan is too good.
The first service that comes to mind is TradingView, an HTML5 charting platform. The free version of the platform is so good that most users will not need to upgrade to a paid plan (that starts at $15/month).
Other companies operate on the fringe in this area. Sumo, an email optin software, is a good example. The free Sumo plan is really good. In many cases, it’s good enough for website owners to avoid paying for a premium subscription. As a Sumo customer, I still use both the free and paid versions on different projects.
Free tier plans should definitely provide value, but they should also be limited enough to incentivize an upgrade.
DON’T: Bait and Switch Customers
There’s a few ways to “bait-and-switch” customers, some of which are more aggressive than others. For our purposes, I’m simply referring to pricing. Many companies try to get customers in the door with a highly discounted introductory offer only to increase the price when the subscription recurs.
Avoiding “bait-and-switch” tactics is a best practice for all businesses, but there’s a takeaway that’s specific to SAAS companies with tiered pricing models.
Heavy discounts across multiple subscription tiers can skew the customer’s decision-making process. Customers may opt for a package that exceeds their needs simply because it is within their budget. When the discount runs out and the regular-priced subscription is billed, the customer is in for a nasty surprise.
Let’s look at SiteGround’s pricing as an example and let me start by saying this company is my go-to hosting provider and I love everything about their business except for this one key detail. I highly recommend the company but I think they could be a bit more transparent with their pricing.
Take a look at the packages they offer:
Your eyes are drawn to the pricing and not the fine print, which can create a major issue when it comes time to renew. Siteground offers highly competitive introductory offers, but these packages renew at a rate that’s up to 300% higher than the introductory offer.
I felt the effects of this firsthand when I purchased a GoGeek subscription for $144 and received a bill for $420 the next year. I actually had three servers with SiteGround so I definitely felt the price increase. Had I paid more attention to the fine print, I may have a) opted for a lower package or b) signed a longer contract to lock in the discounted rate.
I’m not the only one who feels this way. It seems to be the biggest grievance with Siteground, a company with an otherwise stellar reputation for performance and quality.
Now, this isn’t to say companies should avoid offering introductory discounts, but they should think about what happens when it comes time for a customer to renew. SAAS business models operate best when customers stick around for the long run, and a price hike can either cause customers to cancel their plans or leave them frustrated with your company.
SAAS Pricing Examples: The Good
We’ve discussed a few best practices for SAAS pricing. Here are some real-world examples to drive the point home.
Zapier uses a good tiered pricing strategy. The main differentiator is the number of zaps (the core service offering) with a few advanced features sprinkled in for higher tier customers.
Digital Ocean has one of the most flexible pricing strategies out there. Similar to other cloud hosting providers, Digital Ocean offers a range of servers that are paid for “on-demand” (hourly) based on the needs of the customer.
Onlypult uses only two variables to differentiate between plans: number of accounts and number of managers. These are appropriate differentiators and the company doesn’t hold back on any of the features that make the service useful.
WP Rocket is a WordPress plugin that offers pricing plans based on the number of site licenses customers need. A small business owner can use the plugin on a single site for $49/year and a developer can use the plugin on unlimited projects for $249/year.
The pricing is fair across the board and caters to multiple customer groups.
SAAS Pricing Examples: The Bad
ReferralCandy uses an inefficient pricing strategy where monthly subscription costs vary based on company revenue. Customers pay a flat monthly rate + a percentage of sales that come through the platform. This model just seems like a way to get more money out of high-revenue customers.
Higher revenue isn’t necessarily indicative of more sales, nor does it account for profitability. ReferralCandy takes up to a 5% commission on revenue, meaning it can quickly eat into profits for low-margin businesses.
This model also begs the question of, “why?” Why should a customer making more money pay more for the service if they are using less resources than a customer who is making less?
Friendbuy is another referral software company that is similar to ReferralCandy. They too charge based on the revenue of a company. I have firsthand experience opting out of this service due to their pricing.
Once again, what does revenue have to do with software fees? When you pay for QuickBooks accounting software, they don’t charge you more money if you make more money. Likewise, a kitchen equipment company doesn’t increase the price of an oven when they sell to a gourmet restaurant.
iNeedArticles is an on-demand service for ordering articles online. From my experience with this site and a similar site called iWriter, these types of platforms are teeming with spammers and low-quality writers.
You’d think the company would do everything in their power to improve the quality of the articles. After all, most people who order articles, order a lot of them, so customers can be worth a lot of money in this space.
I know this company wouldn’t fall under the SAAS category, but they operate in a similar manner.
iNeedArticles’ basic pricing model actually makes sense. Article pricing varies based on the quality and word count. The company also offers a few add-ons, some of which make sense (i.e. 24-hour delivery) and some of which don’t.
The add-on that surprised me was the option to “Provide specific style direction and detailed instructions.” This add-on is priced at $0.30 per 100 words, meaning it costs an extra $3 per article (20% of the article price) to provide more instructions.
The company is charging an additional fee for customers to provide details that may help the writer deliver a better end product. That would be like a restaurant charging you to choose how you like your steak cooked.
Although technology is a rapidly changing business, SAAS companies should recognize that company growth is a marathon, not a sprint. Squeezing extra revenue out of customers in the short-term will elicit additional costs in the long-term. Unreasonable pricing allows competitors to swoop in and steal your customers.
Keep your customers happy, price your services reasonably, and run a business that is rewarding for both the owners and the customers.